BIS Publishes A “Simplified” Map Of China’s Shadow Banking System

While China’s shadow banking sector may have been tamed in the past year as a result of an aggressive crackdown by Beijing over the unregulated, gray-market in high interest lending and especially Wealth Management Products or WMPs, it, it still retains an aura of incomprehensibility – and thus fascination – to most market watchers.

Still, while growth of shadow credit to ultimate borrowers has slowed, the use of shadow saving instruments (eg wealth management products, trust products) has continued to expand at a fast pace. New and more complex “structured” shadow credit intermediation aimed at reducing banks’ regulatory burden has emerged and quickly reached a large scale. Meanwhile, the bond market has become highly dependent on funding channeled through wealth management products. As a result, Chinese shadow banking is becoming slightly more similar to US shadow banking.

To help China watchers in their analysis of China’s financial underworld, overnight the Bank of International Settlements published a working paper mapping China’s shadow banking sector, which studies the “structure of the shadow banking system in China, focusing on the main activities and linkages with the formal banking sector.”

As the BIS explains in its abstract:

We develop a stylised shadow banking map for China with the aim of providing a coherent picture of its structure and the associated financial system interlinkages. Five key characteristics emerge. One defining feature of the shadow banking system in China is the dominant role of commercial banks, true to the adage that shadow banking in China is the “shadow of the banks”. Moreover, it differs from shadow banking in the United States in that securitisation and market-based instruments play only a limited role. With a series of maps we show that the size and dynamics of shadow banking in China have been changing rapidly.